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The new tax law means it is time to review your estate plan

The new tax law has gotten a lot of media coverage in New York mostly because of the loss of the State and local tax deduction and the end of the “Obamacare” health insurance individual mandate. Less attention is paid to the significant estate and gift tax changes contained in the law. These provisions may eliminate most individual’s potential liability for estate taxes. This represents a golden opportunity for you to review your estate plan with the goal of maximizing the income tax benefits available to your beneficiaries.


The early tax proposals provided for the complete repeal of the federal estate tax. Ultimately, the estate tax was retained, but the amount which can be transferred during life and through an estate was doubled to $11 million per person. [This unified credit reverts to 2017 levels ($5.49 million per person) in 2026 unless Congress acts.] The new law means that a married couple can potentially transfer up to $22 million in assets free of federal estate tax.

As a result of this change, many people no longer have to concern themselves with minimizing estate tax liability when designing their estate plan. However, there are still income tax issues that individuals should understand. The new law preserves the step-up in basis for inherited property, meaning inherited assets take date of death value for purposes of calculating capital gains taxes. A step-up basis can be a significant benefit to heirs who inherit an appreciated asset– when they want to sell that asset, they only recognize taxable income equal to the sales price minus the stepped-up tax basis. The appreciation in the asset’s value during the decedent’s lifetime permanently escapes taxation.

Previously, individuals seeking to avoid estate tax would transfer out assets expected to appreciate in value during their lifetime to bring their estate under the exemption amount and to maximize the benefit of their unified credit. However, with the higher exemption amount, the goal of estate planning has been reversed for many individuals. Individuals and couples who are not approaching the estate tax threshold may be better off leaving appreciated assets in their estate to take advantage of the basis step-up.

That means individuals who no longer have to worry about estate taxes should review their existing estate plan to find out if they can or should revise their plan in order to recapture some of the income tax benefits lost in a plan focused on avoiding estate tax. Many estate plans placed assets which were expected to appreciate in value into trusts. While such a strategy may have been appropriate prior to the increase in the unified credit, assets which are placed in a trust do not receive a step-up in basis. Instead, if those assets are sold, they retain the tax basis from the point the trust was funded (with some adjustments).

However, it may be possible to restructure even irrevocable trusts to take advantage of the step-up in basis and reduce taxes for heirs. Many trusts are set up as grantor trusts, in which certain powers are reserved to the grantor of the trust that results in the trust being disregarded for income tax purposes, even though the transfer in the trust is considered a completed gift for estate and gift tax purposes.

One of the most common reserved powers is a substitution power, which allows the grantor to remove property from a trust and replace it with other property of equivalent value. If an asset which has appreciated in value has been placed in a trust, the grantor can use his/her substitution power to remove the appreciating asset from the trust and exchange it for an asset which does not appreciate in value, like cash. The appreciated asset is now restored to individual ownership and will be eligible for the step-up in basis if held by the individual at death.

It is important to review your estate plan on a regular basis, but particularly after significant changes in tax law. You may be missing opportunities to save on taxes, maximize your estate and protect your heirs.

Read about our estate planning practice or contact one of our experienced estate planning attorneys to schedule a time to discuss your estate plan.

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